What Is Proof of Stake PoS in Crypto? Is It Better Than PoW?

In this blog, we’ll dive into what Ethereum mining was, why it ended, and how staking and other cryptocurrencies have taken its place. The incentive against a malicious actor attempting to compromise a PoW blockchain is the cost of electricity required to generate the sufficient amount of computational energy to take over a majority hash rate. The combined computational power required for an individual to compromise a well-established PoW blockchain like Bitcoin or Ethereum would cost an extraordinary amount of money, and may bitcoin vs ethereum not even exist. The expenditure of computational power costs money in the form of electricity––on top of the initial hardware costs of setting up a functional node. The cost of being a miner, however, is made worthwhile by block rewards.

Expected Returns On Staked Ethereum

If you hold ETH before the Merge, you may automatically receive a balance of tokens on these new PoW forks. The process of claiming these tokens will differ depending on the chain. If you hold ETH on a centralized exchange like Coinbase, the exchange will https://www.xcritical.com/ need to list forked tokens in order for you to claim your share (and it’s not at all clear if they will). Ethereum already has a PoS network called the Beacon Chain (introduced in 2020), but it is not yet used for processing transactions.

• You should not construe any such information or other material as legal, tax, investment, financial, cyber-security, or other advice.
• On 15 September 2022, Ethereum successfully transitioned from a POW consensus mechanism to PoS, reducing its energy consumption by ~99%.
• While validator rewards still accrue on the Beacon Chain and will require a subsequent network upgrade to be withdrawn, transaction fees will be paid, burned, and distributed on the execution layer.
• The Merge represents the Ethereum network’s shift to proof-of-stake (PoS), its new system (also called a “consensus mechanism”) for authenticating crypto transactions.
• You end up doing all that work—consuming vast amounts of energy or staking all those coins—for nothing other than maintaining an illusion.

How to Stake Ethereum Through Crypto Wallets

There is also a risk (however small) that the Proof of work Merge will run into hiccups, or that PoS will prove less secure than PoW in the long run. Ethereum’s proof-of-stake system is already being tested on the Beacon Chain, launched on December 1, 2020. So far 9,500,000 ETH ($37 billion, in current value) has been staked there.

Does PoS give preferential treatment to people who stake more ETH?

As with proof of work, this is difficult but not impossible to achieve. The main advantage, in terms of investment, of PoS is that unlike with PoW, it offers lower ongoing costs. It is less energy intensive and does not require constant upgrades to the mining setups that proof-of-work demands. But ultimately, supply and demand determines many of the costs to participate in both consensus mechanisms, and those costs will always fluctuate.

Ethereum, the second-largest blockchain network, completed its transition to a new system for processing transactions on Sept. 15, 2022. Something similar happened in 2016, after Ethereum developers rolled back the blockchain to erase a massive hack. Some community members were so upset they kept mining the original chain, resulting in two Ethereums—Ethereum Classic and what we have today. If it happens again, the success (and mining power) behind any competing version of Ethereum will depend on the value of its coin in the open markets. A common argument amongst proponents of proof-of-work is that proof-of-stake favors the rich and reduces the rewards for those with less ether. Solo staking is viewed as the gold standard as it allows users to retain complete autonomy over their hardware and funds.

A user on BitcoinTalk proposed the basic idea of proof-of-stake(opens in a new tab) as an upgrade to Bitcoin in 2011. It was eleven years before it was ready to implement on Ethereum Mainnet. Some other chains implemented proof-of-stake earlier than Ethereum, but not Ethereum’s specific mechanism (known as Gasper). Crypto analysts predict that Ethereum could hit new all-time highs in either 2024 or 2025, depending on how the crypto market performs. This bullish outlook is based on the recent Bitcoin halving event last Apr. 19, 2024 and the increasing adoption of Ethereum in DeFi, NFTs, gaming and the metaverse. The recent approval of spot ETH ETFs have also caused a surge in Ethereum’s price to $3,935.

She wrote about the promises of crypto and Web3 for MIT Technology Review’s Money Issue earlier this year. The crypto industry is investing heavily in getting more people to buy in. It may also become easier for developers to build programmes on the Ethereum network, potentially boosting adoption. With the recent Merge now complete after years of work, Ethereum’s transition to Proof of Stake is now active. But the process as a whole is not complete, so its full impact is still not seen.

It’s free to download and use, but there are fees for buying, selling and swapping crypto. In September 2022, it underwent a major upgrade that switched its consensus mechanism from proof-of-work to proof-of-stake, making it more scalable, secure and energy-efficient. Ethereum also plans to implement sharding, as part of the Cancun upgrade, which will further increase its capacity and performance. Despite this, the profitability of mining has decreased due to higher competition and operational costs.

Pre-merge, this was strongly recommended, but some validators have outsourced these functions to third-party providers. This was possible because the only data required on the execution layer were updates to the deposit contract. In addition to Casper, Ethereum’s proof-of-stake uses a fork choice algorithm called LMD-GHOST. This is required in case a condition arises where two blocks exist for the same slot. LMD-GHOST picks the one that have the greatest “weight” of attestations. The weight is the number of attestations weighted by the effective balance of the validators.

The first step is a network upgrade, Bellatrix, on the consensus layer triggered by an epoch height. This is followed by the execution layer’s transition from proof-of-work to proof-of-stake, Paris, triggered by a specific Total Difficulty threshold called the Terminal Total Difficulty (TTD). Different blockchain projects choose different consensus algorithms depending on their goals, but proof of stake has emerged as the better alternative to the original consensus mechanism, proof of work. The main thing to look out for with PoS is the distribution of stakes. If a small group of users holds a majority of the staked coins, they could potentially gain unfair control over the network. However, due to its energy-intensive nature, proof of work has faced trouble scaling up to accommodate the massive volume of crypto transactions.

If you don’t have that kind of spare change on hand, and not many people do, you can join a staking service where participants serve as validators jointly. Ethereum uses 113 terawatt-hours per year—as much power as the Netherlands, according to Digiconomist. A single Ethereum transaction can consume as much power as an average US household uses in more than a week. One of the world’s biggest blockchains is testing a new way to approve transactions. The move has been many years in the making but doesn’t come without risks. Although RANDAO is still subject to potential bias or manipulation when generating the final number, for now, it’s considered secure enough.

The chance of being selected as a proposer of the next block is proportionate to the amount of tokens staked by a node. PoS is a newer approach that aims to address some of the inefficiencies of the PoW consensus mechanism and reduce the computational resources required. A Proof of Stake (PoS) network is a system that uses staked cryptocurrency to secure itself. Every validator node must have “locked up” a security deposit consisting of ETH on the network in order to participate in consensus. By using the crypto as collateral, it compels the nodes to behave properly and helps to keep the network secure. In terms of blockchain, the consensus is the process by which a group of nodes on a network determines which blockchain transactions are valid.

However, with the transition, Ethereum 2.0 morphed into a PoS network where validators are required to stake 32 ETH to activate a node and perform validation of the transactions. A validator is chosen for every block proposed and earns network fees from the transactions. This is what facilitated a stark drop in energy consumption, as there is no need for validators to own expensive and energy-consuming mining rigs. The Ethereum network missed just one block during the transition and, after 12 minutes and 48 seconds, successfully reached finality.

As of December 2, 2024, Ether is trading at $3,612.12, and it’s the second-largest cryptocurrency by market capitalization, sitting at over $435 billion. Ether can surpass its all-time high (ATH) of $4,891.70, which it reached on Nov.16, 2021. Most analysts expect the price of Ether to go up in the long term based on its widespread adoption, scalability solutions and leadership in decentralized applications. Conceived by Vitalik Buterin in 2014, Ethereum launched in 2015 with the vision of creating a programmable blockchain that can support many different use cases beyond payments. Ethereum has since become the foundation for innovative projects that leverage blockchain technology for various purposes.